$321B in new PPP small biz loans adds to $3.7T estimated government deficit
Gone quicker than a 24-pack of TP... Remember that $349B in forgivable loans to small businesses from the $2T stimulus package? That ran out quickly — especially since not-so-small businesses got multi-million loans. Now Congress has approved an extra $321B for Paycheck Protection Program loans (PPP), which become "free money" for businesses if they keep their workers employed. All that free money though is adding up...
- $3.7T: That's how much the government expects to add to the national debt this year, aka its budget deficit. The previous record deficit? $1.5T in 2010.
- 110%: That's America's current debt-to-GDP ratio (like your personal debt amount vs. your annual salary, but for the country). US Gross Domestic Product is around $21.7T — the national debt is almost $25T.
The US borrows $$$ by offering IOUs to investors... They're called "Treasury securities", aka US government bonds. Most of that debt is held by regular Americans through pension and mutual funds and a large part is owned by foreign governments (think China).
- US debt is typically seen as a relatively safe investment — buyers are confident that America will pay them back, given the country's world-leading wealth, income, and economic resources. That low riskiness is reflected by the US' AA+ credit rating and helps explain why America pays barely any interest on its debt. But...
- Higher debt usually means higher interest rates. If investors think they might not get paid back, they might start demanding higher interest (higher risk, higher demanded reward).
- Tomorrow's generations will have to repay today's debts. But debt-financed government spending seems necessary to save the economy from the giant economic hole caused by the COVID-19 shutdown.
There are 2 ways to pay down national debt... and they both have consequences.
- Cut Spending: The government can divert spending on social services to repay bond investors instead. The more debt there is, the less money is left to pay for things like healthcare, education, and national defense.
- Raise Taxes: The government could tax businesses and citizens more in order to repay debt. But higher taxes can slow down economic growth, and potentially be counter-productive to debt repayment (if too-high taxes cause a recession).